The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentrations and Risks

The Company, from time to time, has cash balances in excess of the maximum amount insured by the FDIC.

Substantially all of Technest, Inc.’s revenues are currently generated from individual customers within the Department of Defense and the National Institute for Health under Small Business Innovative Research contracts. These contracts do not contain extension or renewal terms and there was no remaining backlog at June 30, 2012.

During the year ended June 30, 2012, all of AccelPath’s revenues were generated from two laboratories and one hospital.  During the year ended June 30, 2011, all of AccelPath’s revenues were generated from one laboratory and one hospital.

Risks associated to companies in the homeland defense technology industry and the anatomic pathology market, include, but are not limited to, the development by its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology and loss of significant customers.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of ninety days or less to be cash equivalents. The Company had no cash equivalents as of June 30, 2012 and 2011.

Restricted Cash

Restricted cash represents cash held in escrow pending final settlement of certain liabilities related to discontinued operations.

Accounts Receivable

At June 30, 2012, accounts receivable includes $40,942 invoiced by AccelPath for services rendered to one hospital.  At June 30, 2011, accounts receivable includes $155,376 invoiced by Technest under government contracts and $73,118 invoiced by AccelPath for services rendered.

An allowance for doubtful accounts is determined based on management's best estimate of probable losses inherent in the accounts receivable balance.  Management assesses the allowance based on known troubled accounts, historical experience and other currently available evidence.  All of Technest’s receivables are due from government contracts, either directly or as a subcontractor. The Company has not experienced any material losses in accounts receivable related to these contracts and has provided no allowance for contract receivables at June 30, 2012 and 2011. Billings for AccelPath’s services reimbursed by third-party payers are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers.  If management determines amounts to be uncollectible, they will be charged to the allowance when that determination is made.

Unbilled receivables, if any, represent amounts earned related to allowable costs incurred under contracts but not billed. 

During the year ended June 30, 2012, AccelPath charged allowances for differences between amounts billed and estimated receipts totaling $1,450 against revenues and charged off $10,450 of unpaid accounts receivable against the allowance based on adjustments and updated claims experience with third-party payers.

During the year ended June 30, 2011, AccelPath charged allowances for differences between amounts billed and estimated receipts totaling $329,000 against revenues and during the fourth quarter AccelPath charged off $320,000 of unpaid accounts receivable against the allowance based on adjustments and updated claims experience with third-party payers.

Inventory and Work in Process

Inventories, if any, are stated at the lower of cost or market.  Cost is determined by the first-in, first-out method and market represents the lower of replacement costs or estimated net realizable value. Work in process represents allowable costs incurred but not billed related to time and material contracts.  Costs incurred on firm fixed price contracts with milestone payments are recorded as work in process until all milestone requirements have been achieved. 

Property and equipment are valued at cost and are being depreciated over their useful lives using the straight-line method for financial reporting purposes. Routine maintenance and repairs are charged to expense as incurred. Expenditures which materially increase the value or extend useful lives are capitalized.

The Company accounts for internally developed software by capitalizing development costs incurred during the application development stage until the software is ready for its intended use.  Capitalized internal use software development costs are amortized on a straight line basis over the estimated useful life of the software, beginning on the date the software is completed and available for use.  Development costs of minor upgrades and enhancements are expensed as incurred.  Net capitalized development costs are reviewed for impairment annually by management.

Property and equipment are depreciated over the estimated useful lives of assets as follows:

Property and equipment consisted of the following at June 30, 2012 and 2011:

Depreciation and amortization expense for the years ended June 30, 2012 and 2011 was $4,424 and $1,249, respectively.

Customer Contracts

In the reverse acquisition, the Company acquired Technest, Inc.’s existing customer contracts with the National Institute of Health and the Department of Defense. The amounts assigned to these definite-lived intangible assets were determined by management based on a discounted cash flow of existing backlog and a projection of existing customer revenue.

The customer contracts had a cost basis of $350,000 and were being amortized over an estimated life of two years.  Amortization expense was $175,000 and $58,332 for the years ended June 30, 2012 and 2011, respectively.

The Company considered the fair value of the customer contracts at June 30, 2012 and concluded that the balance of $116,668 was impaired.  These contracts do not contain extension or renewal terms and there was no remaining backlog at June 30, 2012.  Therefore, the Company recognized an impairment loss of $116,668 in the fourth quarter of the year ended June 30, 2012.

Fair Value Measurements

Financial instruments are recorded at fair value in accordance with the standard for “Fair Value Measurements codified within ASC 820.” Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1-Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2-Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3-Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

Unless otherwise indicated, the fair values of financial instruments approximate their carrying amounts. By their nature, all financial instruments involve risk, including credit risk for non-performance by counterparties.  The fair value of cash, accounts receivable, accounts payable, notes payable, discontinued operating assets and liabilities and the contingent value rights payable approximate their recorded amounts because of their relatively short settlement terms.

The Company also applies fair value accounting guidance to measure non-financial assets and liabilities such as business acquisitions and asset impairments.  These assets and liabilities are subject to fair value adjustments only in certain circumstances and are not subject to recurring revaluations.  These items are primarily valued using the present value of estimated future cash inflows and/or outflows.  Given the unobservable nature of these inputs, they are deemed to be Level 3.  During the year ended June 30, 2012, the Company recognized impairment on its long-lived assets (see below).

Operating Segments

The Company operates in two operating segments which are consistent with its internal organization. The major segments are medical diagnostic services, and government contracting in the business of research and development, design and fabrication of 3D imaging and of intelligent surveillance products.

Revenue Recognition

Revenues from medical diagnostic services are recognized upon completion of the services and the billing to customers.  Billings for services expected to be reimbursed by third party payers are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers and are based on management’s assessment of collection. Billings for services directly to hospitals are fixed in advance and are considered collectible by management.

Government contracting revenues from time and materials contracts are recognized as costs are incurred and billed. Allowable costs incurred but not billed as of a period end are recorded as work in process.

Government contracting revenues from firm fixed price contracts, if any, are recognized on the percentage-of-completion method, either measured based on the proportion of costs recorded to date on the contract to total estimated contract costs or measured based on the proportion of labor hours expended to date on the contract to total estimated contract labor hours, as specified in the contract. Revenues from firm fixed price contracts with payments tied to milestones are recognized when all milestone requirements have been achieved and all other revenue recognition criteria have been met.   Costs incurred on firm fixed price contracts with milestone payments are recorded as work in process until all milestone requirements have been achieved.

Provisions for estimated losses on all contracts are made in the period in which such losses become known. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Technology Licensing Income 

Technology licensing income consists of income related to the licensing of certain intellectual property under a settlement agreement with a former employee.  The Company has collected and recognized the entire $120,000 licensing fee in the settlement agreement and is entitled to additional licensing fees based on future events.

Research and Development

The Company charges unfunded research and development costs to expense as incurred.  Funded research and development is part of the Company’s revenue base and the associated costs are included in cost of revenues. The Company capitalizes costs related to acquired technologies that have achieved technological feasibility and have alternative uses. Acquired technologies which do not meet these criteria are expensed as in-process research and development costs.

Income Taxes

The Company allocates current and deferred taxes to its subsidiaries as if each were a separate tax payer.  The Company has no unrecognized tax benefits or uncertainties requiring additional disclosures.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. A deferred tax asset is recorded for net operating loss and tax credit carry forwards to the extent that their realization is more likely than not. The deferred tax benefit or expense for the period represents the change in the deferred tax asset or liability from the beginning to the end of the period.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

The Company is primarily subject to U.S. federal income tax, and Maryland and Massachusetts state income taxes.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.

Loss Per Share

Basic and diluted net loss per common share available to common shareholders has been computed based on the weighted average number of shares of common stock outstanding during the periods presented. Basic and diluted net loss per common share is computed by dividing net loss by the weighted-average common shares outstanding during the year.

Common stock equivalents, consisting of Series E 5% Convertible Preferred Stock, stock options, restricted stock, and warrants were not included in the calculation of the diluted loss per share for the years ended June 30, 2012 and 2011 because their inclusion would have been antidilutive and had the effect of decreasing the net loss per share (see Note 11).

Goodwill and Impairment 

Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in business combinations.  Goodwill will not be amortized but will be tested at least annually for impairment.   The purchase price allocation (See Note 1) was preliminary and was subject to change as the contingent value rights payable were subject to adjustment for certain future events as defined in the contingent value rights agreement.

The Company is required to test goodwill for impairment at least annually at the reporting unit level in lieu of being amortized. A two-step impairment test for goodwill and intangible assets with indefinite lives is required. The first step is to compare the carrying amount of the reporting unit's net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying amount exceeds the fair value, then the second step is required to be completed, which involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill.

To estimate the fair value of its reporting unit containing the goodwill at June 30, 2011, the Company utilized a discounted cash flow model on the Technest government contracting operating segment.  In estimating fair value, management relied on and considered a number of factors, including but not limited to, future revenue growth by product/service line, operating profit margins and overhead expenses. Subsequent to the reverse acquisition management reassessed the potential for new government contracts and due to employee turnover and other factors management expected limited future revenues beyond the current backlog.

The Company considered the fair value of the Technest reporting unit and concluded that its goodwill balance of approximately $1.2 million at June 30, 2011 was impaired.  Therefore, the Company recognized an impairment loss of approximately $1.2 million in the fourth quarter of the year ended June 30, 2011.  During the year ended June 30, 2012, the Company adjusted the contingent value rights payable which resulted in an additional goodwill impairment loss of $48,158.  There was no goodwill at June 30, 2012 and 2011.

Impairment of Long-Lived Assets

The Company amortizes intangible assets over the shorter of the contractual/legal life or the estimated economic life.

The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than the asset's carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. At June 30, 2012, the Company tested its long-lived assets for impairment and recorded an impairment charge of $116,668 on its customer contracts intangible asset.  No impairment charges were recorded in the year ended June 30, 2011.

Stock-Based Compensation

The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors as an expense in the statement of operations over the requisite service period based on the fair value for each stock award on the grant date.

Recent Accounting Pronouncements

The Company has reviewed recent accounting pronouncements and other recently issued, but not yet effective accounting standards and believes that these will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.